After seeming almost impervious to every potential risk over the past year, the U.S. stock market finally succumbed to the Coronavirus. As the virus began to spread out of China and into Europe and North America, U.S. stocks began to plummet in late February, suffering their worst weekly loss since the Great Financial Crisis in 2008. And it wasn’t only stocks that responded, bonds caught a major bid as investors rushed into U.S. Treasuries for safety, driving prices higher and yields to all-time-lows on the 10-and-30 year Treasury bond. The following are a few items the investment committee of PYA Waltman is wrestling with as we attempt to assess the potential impact of this new and emerging threat.
We believe the Coronavirus will have an impact on global economic growth. The depth and severity of the impact largely depends upon how widespread the virus becomes, the duration of the outbreak, and the public’s response. The market has already severely punished those companies most directly affected by the outbreak including airlines, cruise operators, and hotels to name but a few. Most companies will feel at least some effect from the outbreak. If the virus lingers for months causing employers to shut down operations, it may begin to affect the global supply chain, thereby impacting many industries in a more pronounced way. And even if the outbreak of the virus itself ends up being well-contained, it could still negatively impact the economy if the general public greatly curtails their spending because of fear of infection.
On Friday February 28th, Federal Reserve (the Fed) Chairman Jerome Powell said the Fed stands ready to support the U.S. economy as needed. As usual the financial markets are ahead of the Fed and are now discounting a series of interest rate cuts by the central bank in the coming months. While one may argue whether lower interest rates will be effective when the threat is a virus, it should reassure financial markets and ease financial conditions for companies. In addition, there is discussion of a possible coordinated central bank action globally if the world economy begins to slow precipitously. We are quite confident, that if necessary, the Fed and other central banks will act and act aggressively to attempt to arrest any downturn.
Financial markets hate uncertainty. The Coronavirus is one big fat uncertainty. Given this, expect to continue to see wild volatility in the financial markets as investors attempt to discount the possibility of a global recession versus a short-term threat which results in a bounce back in economic activity in the back half of the year. While it is impossible for anyone to know with certainty what will happen, it is not implausible to envision one scenario whereby the economy slows over the near-term but strengthens later in the year as pent-up demand returns and the Fed’s stimulus starts to work its way through the financial system.
The world is a very complex place full of risks and opportunities. This recent outbreak is a reminder to all investors to guard against complacency and recency bias. In investing as in life, there are unknown unknowns - the things that will occur that we cannot anticipate happening or even imagine happening. That is why it is imperative to build resilient portfolios. At PYA Waltman this is done by crafting diversified portfolios comprised of stocks, bonds, real estate and cash as well as the inclusion of non-correlated assets that act independently of traditional asset classes. It’s important to remember that stock market corrections are a normal part of investing and create opportunities for long-term investors. We will remain vigilant in our attempt to build resilient portfolios and strive to opportunistically add to great companies as prices become more attractive.
We appreciate the confidence you place in us. The opinions expressed are those of PYA Waltman’s (“PYA”) Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
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